The following discussion compares the consolidated financial condition of the Company at September 30, 2009 and December 31, 2008, and the results of operations for the three- and nine-month periods ended September 30, 2009 and 2008. This discussion should be read in conjunction with the interim financial statements and footnotes included herein.

OVERVIEW

The Company currently operates as a community-oriented financial institution that accepts deposits from the general public in the communities surrounding its 8 full-service banking centers. The deposited funds, together with funds generated from operations and borrowings, are used by the Company to originate loans. The Company's principal lending activity is the origination of mortgage loans for the purchase or refinancing of one-to-four family residential properties. The Company also originates commercial and multi-family real estate loans, construction loans, commercial loans, automobile loans, home equity loans and lines of credit, and a variety of other consumer loans.

For the quarter ended September 30, 2009, the Company reported a net loss from continuing operations of $1.5 million compared to a net loss of $610,000 for the year earlier period, a decrease in earnings of $886,000. For the nine months ended September 30, 2009, the net loss from continuing operations was $1.3 million compared to a net loss of $860,000 for the nine months ended September 30, 2008.

Total assets decreased by $8.3 million, or 3.3%, to $239.4 million from December 31, 2008 to September 30, 2009. Investment securities available for sale increased by $7.2 million from December 31, 2008 to September 30, 2009. Net loans receivable decreased $13.5 million or 7.0% during that same time period. Total deposits decreased $9.4 million, or 5.7% from December 31, 2008 to September 30, 2009 and REPO Sweep accounts decreased by $2.6 million, or 27.3% during that same time period.. Federal Home Loan Bank advances decreased by $6.6 million from December 31, 2008 to September 30, 2009. Equity decreased by $3.5 million, or 11.8% during the nine-month period ended September 30, 2009.

CRITICAL ACCOUNTING POLICIES

As of September 30, 2009, except for the addition of the valuation of deferred tax assets as a critical accounting policy (discussed below), there have been no changes in the critical accounting policies as disclosed in the Company's Form 10-K for the year ended December 31, 2008. The Company's critical accounting policies are described in the Management's Discussion and Analysis and financial sections of its 2008 Annual Report. Management believes its critical accounting policies relate to the Company's securities, allowance for loan losses, mortgage servicing rights and intangibles.

Management has determined that the valuation of deferred tax assets represented a critical accounting policy at September 30, 2009. Deferred tax assets and liabilities represent differences between when a tax benefit or expense is recognized for financial reporting purposes and on our tax return. Deferred tax assets are periodically assessed for recoverability. The Company records a valuation allowance if it believes, based on available evidence, that it is "more likely than not" that the future tax assets recognized will not be realized before their expiration. The amount of the deferred tax asset recognized and considered realizable could be reduced if projected taxable income is not achieved due to various factors such as unfavorable business conditions. If projected taxable income is not expected to be achieved, the Company records a valuation allowance to reduce its deferred tax assets to the amount that it believes can be realized in its future tax returns. At September 30, 2009 the Company recorded a valuation allowance of $2.0 million related to its deferred tax assets.

COMPARISON OF FINANCIAL CONDITION AT SEPTEMBER 30, 2009 AND DECEMBER 31, 2008

ASSETS: Total assets decreased $8.3 million, or 3.4%, to $239.4 million at September 30, 2009 from $247.7 million at December 31, 2008. During that nine-month time period the following changes occurred: investment securities available for sale increased $7.2 million, or 28.1%, to $32.9 million; other real estate owned increased $1.9 million, or 115.9%, to $3.5 million; and net loans receivable decreased $13.5 million, or 7.0%, to $178.7 million. Total mortgage loans decreased by $9.2 million, consumer loans decreased by $3.3 million and total commercial loans decreased by $2.4 million as loan originations declined due to weaker economic conditions in our primary lending markets.

LIABILITIES: Deposits decreased $9.4 million, or 5.7%, to $156.4 million at September 30, 2009 from $165.8 million at December 31, 2008, a time period during which we were not a market-leader in deposit rates except in some longer-term maturities. Most of the decrease was in our certificates of deposit, as some of which were set to renew at lower rates and left the Bank. During this same time period, Repo sweep accounts decreased $2.6 million as several of our commercial customers reduced the amount on deposit with us due to timing of their expenses, but did not close accounts. FHLB advances increased $6.6 million, or 16.3%, to $46.8 million at September 30, 2009 from $40.2 million at December 31, 2008 as we replaced lost deposits with borrowings.

EQUITY: Stockholders' equity decreased to $26.0 million at September 30, 2009 from $29.4 million at December 31, 2008, a decline of $3.5 million. The decrease in stockholders' equity was mainly attributable to our net loss for the nine-month period of $3.7 million primarily as a result of a $3.0 million Provision for Loan Losses and a $2.0 million valuation allowance on our deferred tax assets for the nine-month period The unrealized gain on available for sale securities, net of tax, was $382,000 at September 30, 2009 as compared to $337,000 at December 31, 2008, an increase of $44,000.

RESULTS OF OPERATIONS

Three Months Ended September 30, 2009 Compared to Three Months Ended September 30, 2008

General: Net income from continuing operations decreased by $3.2 million to a net loss of $3.8 million for the three months ended September 30, 2009 from a net loss of $610,000 for the same period ended September 30, 2008. This decrease was attributable to two main factors: an increase in provision for loan losses of $2.1 million to $3.0 million for the three months ended September 30, 2009 as compared to $875,000 for the same period in 2008 and a valuation allowance of $2.0 million on our deferred tax assets. Partially offsetting these negative factors period over period were an increase in net interest income of $176,000, an increase in non-interest income of $92,000 and a reduction in our non-interest expense of $81,000 period over period. These factors are all discussed in greater detail below.

Interest Income: Interest income was $3.1 million for the three months ended September 30, 2009, compared to $3.5 million for the comparable period in 2008. The decrease in interest income was due primarily to two factors: a decrease in the average balance of our interest-earning assets due to a reduction in the size of our loan portfolio and a decrease in the yield on interest-earning assets due in part to lower market interest rates. The average balances of AFS investment securities increased $3.9 million. The average balance of mortgage loans decreased $9.9 million period over period and the average balance of non-mortgage loans decreased $4.0 million quarter over quarter, as we continued to experience a decline in loan originations due to economic conditions in our market areas.

Interest Expense: Interest expense was $1.2 million for the three month period ended September 30, 2009, compared to $1.8 million for the same period in 2008. The decrease in interest expense for the three-month period was due primarily to a $12.1 million decrease in the average balances of certificates of deposits period over period and a 121 basis point decline in average rate on those deposit due mainly to higher-costing certificates which matured and re-priced lower in the lower market interest rate environment. We experienced a $6.2 million decrease in the average balance of FHLB advances for the three months ended September 30, 2009 when compared to the same period in 2008 and the average rate on those advances decreased 45 basis point to 3.95% for the three-month period ended September 30, 2009 as compared to the year-earlier period.

The following table sets forth information regarding the changes in interest income and interest expense of the Bank during the periods indicated.

                                               Quarter ended September 30, 2009
                                                          Compared to
                                               Quarter ended September 30, 2008
                                                  Increase (Decrease) Due to:
                                             Volume            Rate           Total
                                                        (In thousands)
      Interest-earning assets:
      Loans receivable                     $     (211 )     $     (183 )     $  (394 )
      Mortgage-backed securities                    1               15            17
      Investment securities                       (15 )             13       $    (2 )
      Other investments                           (50 )             16       $   (34 )

      Total interest-earning assets              (275 )           (139 )        (414 )

      Interest-bearing liabilities:                                                -
      Savings Deposits                              -               (2 )          (2 )
      Money Market/NOW accounts                    73              (93 )         (21 )
      Certificates of Deposit                    (154 )           (269 )        (423 )
      Deposits                                    (81 )           (364 )        (446 )
      Borrowed funds                              (43 )           (101 )        (144 )

      Total interest-bearing liabilities         (124 )           (465 )        (590 )

      Change in net interest income        $     (151 )     $      326       $   176

Net Interest Income: Net interest income increased to $1.9 million for the three month period ended September 30, 2009 compared to $1.7 million for the same period in 2008. For the three months ended September 30, 2009, average interest-earning assets decreased $15.1 million, or 6.4%, to $222.3 million when compared to the same period in 2008. Average interest-bearing liabilities decreased $11.1 million, or 5.3%, to $197.9 million for the quarter ended September 30, 2009 from $209.0 million for the quarter ended September 30, 2008. The yield on average interest-earning assets decreased to 5.58% for the three month period ended September 30, 2009 from 5.92% for the same period ended in 2008 due mainly to decreases in the yields on our non-mortgage loans, partially as a result of loans placed on non-accrual status, and due to lower yields on the securities in our investment portfolio due to lower market interest rates. The cost of average interest-bearing liabilities decreased to 2.43% from 3.42% for the three month periods ended September 30, 2009 and September 30, 2008, respectively. The decrease in asset yields on interest earning assets, offset by a greater decrease in our cost of funds resulted in a increase in our net interest margin of 50 basis points to 3.41% for the three month period ended September 30, 2009 from 2.91% for same period in 2008.

Provision for Loan Losses: The allowance for loan losses is established through a provision for loan losses charged to earnings. Loan losses are charged against the allowance when management believes the uncollectibility of a loan balance is confirmed. Subsequent recoveries, if any, are credited to the allowance.

The allowance for loan losses is evaluated on a regular basis by management and is based upon management's periodic review of the collectability of the loans in light of historical experience, the nature and volume of the loan portfolio, adverse situations that may affect the borrower's ability to repay, estimated value of any underlying collateral and prevailing economic conditions. This evaluation is inherently subjective, as it requires estimates that are susceptible to significant revision as more information becomes available. The provision for loan losses amounted to $3.0 million for the three month period ended September 30, 2009 and $875,000 for the comparable period in 2008. During the quarter ended September 30, 2009, the Company increased its reserves on certain commercial and mortgage loans based on deterioration of those credits during the quarter. In particular, reserves on two large commercial real-estate relationships accounted in large part for the higher provision in the quarter ended September 30, 2009 as compared to the quarter ended September 30, 2008. In addition, due to our recent charge-off history, the loss factor applied to our portfolio of performing loans has increased causing an increase in the overall loan loss reserve.

The following table sets forth the details of our loan portfolio at the dates indicated:

                                                                     Delinquent
                                                     Portfolio          Loans          Non-Accrual
                                                      Balance       Over 90 Days          Loans
                                                                 (Dollars in thousands)
At September 30, 2009
Real estate loans:
Construction                                         $   14,327     $           -     $       4,818
One - to four - family                                   82,990               782             2,642
Commercial Mortgages                                     46,024                 -             2,131
Home equity lines of credit/ Junior liens                19,778                17               145
Commercial loans                                         17,391                12               206
Consumer loans                                            2,833                29                 -

Total gross loans                                    $  183,343     $         840     $       9,942
Less:
Net deferred loan fees                                     (296 )             (33 )              (1 )
Allowance for loan losses                                (4,309 )              (5 )          (1,751 )
Total loans, net                                     $  178,738     $         802     $       8,190

At December 31, 2008
Real estate loans:
Construction                                         $   19,128     $           -     $       5,449
One - to four - family                                   91,339               128             1,877
Commercial Mortgages                                     47,541                72             4,442
Home equity lines of credit/Junior liens                 22,303                 -                86
Commercial loans                                         14,316                 -                95
Consumer loans                                            3,564                17                 3

Total gross loans                                    $  198,191     $         217     $      11,952
Less:
Net deferred loan fees                                     (274 )             (29 )              (1 )
Allowance for loan losses                                (5,647 )              (1 )          (3,565 )
Total loans, net                                     $  192,270     $         187     $       8,386

Non Interest Income: Non interest income was $491,000 for the three month period ended September 30, 2009, an increase of $92,000 or 23.1% from the same period in 2008. This was primarily attributable to an increase in mortgage banking activities income of $159,000 period over period. Although mortgage refinances slowed steadily throughout the third quarter of 2009, the levels of activity were still significantly higher than during the third quarter of 2008. We sold the majority of those refinanced mortgage loans into the secondary market. The increase in mortgage banking activities income was partially offset by a decrease of $28,000 in service charges and other fees. Insurance and brokerage commission income decreased period over period as a result of the timing of receipt of the commissions.

Non Interest Expense: Non interest expense was $2.1 million for the three month period ended September 30, 2009, an $81,000 or 3.8%, decrease from the same period in 2008. The decrease was due mainly to a decrease of $108,000 in compensation and employee benefits as we actively sought to contain costs in this area and a decrease of $18,000 in professional services fees. These decreases were partially offset by an increase of $73,000 in our FDIC premiums period over period due to an increase in our general FDIC assessment rate.

Income Taxes: The Company had a federal income tax expense of $1.1 million for the three-month period ended September 30, 2009 compared to a benefit of $307,000 for the same period in 2008. Federal income tax expense for the three-month period ended September 30, 2009 was impacted by the valuation allowance on our deferred tax assets of $2.0 million. The Company recorded this valuation allowance because it concluded, based on currently available evidence, that it is "more likely than not" that the future tax assets recognized will be not be realized before their expiration.

Nine Months Ended September 30, 2009 Compared to Nine Months Ended September 30, 2008

General: Net income from continuing operations decreased $2.8 million to a net loss of $3.6 million for the nine months ended September 30, 2009 from net loss of $860,000 for the same period ended September 30, 2008. The decrease in earnings period over period was primarily attributable to the same two main factors as were discussed for the three-month period comparison: an increase in provision for loan losses of $2.3 million to $3.5 million for the nine months ended September 30, 2009 as compared to $1.2 million for the same period in 2008 and a valuation allowance of $2.0 million on our deferred tax assets. In addition, non-interest expenses increased $99,000 period over period. Partially offsetting these negative factors were an increase in net interest income of $430,000 and an increase in our non-interest income of $783,000 nine-month period over nine-month period.

Interest Income: Interest income was $9.6 million for the nine months ended September 30, 2009, compared to $10.6 million for the comparable period in 2008. This decrease of $1.0 million, or 9.6%, in interest income was due in large part to a decrease of $8.0 million in average balances of mortgage loans and a 73 basis point decrease to 5.69% period over period in the yield on our non-mortgage loan portfolio, which carried an average balance of $105.0 million for the nine month period ended September 30, 2008. The yield decrease on non-mortgage loans was in large part due to loans placed on non-accrual status during the nine-month period.

Interest Expense: Interest expense was $4.0 million for the nine month period ended September 30, 2009 compared to $5.5 million for the same period in 2008. The decrease in interest expense was due primarily to decreases in the average balance of and interest rates on our Federal Home Loan Bank ("FHLB") advances period over period. We experienced a $7.1 million decrease in the average balance of FHLB advances for the nine months ended September 30, 2009 when compared to the same period in 2008 and the average rate on those advances decreased 47 basis points to 4.03% for the nine-month period ended September 30, 2009 as compared to the year-earlier period. In addition, our cost of funds relating to our certificates of deposit decreased 101 basis points to 3.22% nine-month period over nine-month period, due mainly to higher-costing certificates which matured and re-priced lower.

The following table sets forth information regarding the changes in interest income and interest expense of the Bank during the periods indicated.

                                                Year to Date September 30, 2009
                                                          Compared to
                                                Year to Date September 30, 2008
                                                  Increase (Decrease) Due to:
                                            Volume             Rate          Total
                                                        (In thousands)
      Interest-earning assets:
      Loans receivable                     $    (363 )     $       (642 )   $ (1,005 )
      Mortgage-backed securities                 147                 18          165
      Investment securities                       17                (61 )   $    (44 )
      Other investments                          (65 )              (72 )   $   (137 )

      Total interest-earning assets             (264 )             (757 )     (1,020 )

      Interest-bearing liabilities:                                                -
      Savings Deposits                             -                 (4 )         (4 )
      Money Market/NOW accounts                   45                (27 )         18
      Certificates of Deposit                   (237 )             (748 )       (985 )
      Deposits                                  (192 )             (779 )       (971 )
      Borrowed funds                            (175 )             (304 )       (479 )

      Total interest-bearing liabilities        (368 )           (1,082 )     (1,450 )

      Change in net interest income        $     104       $        326     $    430

Net Interest Income: Net interest income increased by $430,000 for the nine month period ended September 30, 2009 compared to the same period in 2008. For the nine months ended September 30, 2009, average interest-earning assets decreased $6.5 million, or 2.8%, when compared to the same period in 2008. Average interest-bearing liabilities decreased $4.9 million, or 2.4% for the same period. The yield on average interest-earning assets decreased to 5.63% for the nine month period ended September 30, 2009 from 6.03% for the same period ended in 2008. The cost of average interest-bearing liabilities decreased to 2.70% from 3.53% for the nine month periods ended September 30, 2009 and September 30, 2008, respectively. The net result of the 41 basis point decrease in asset yields and 87 basis point decrease in the cost of funds was a net interest rate margin increase of 34 basis points to 3.28% for the nine month period ended September 30, 2009, from 2.94% for the same period in 2008.

Delinquent Loans and Nonperforming Assets: The following table sets forth information regarding loans delinquent 90 days or more and real estate owned/other repossessed assets of the Bank at the dates indicated. As of the dates indicated, the Bank did not have any material restructured loans within the context of SFAS 15.

Non-accrual loans decreased by $2.0 million from December 31, 2008 to September 30, 2009. The majority of this decrease was one large commercial loan relationship totaling approximately $4.3 million which was repossessed, charged-off and recorded as commercial real estate owned at net realizable value during the nine months ended September 30, 2009. That same commercial relationship accounts for the majority of the $2.1 million increase from December 31, 2008 to September 30, 2009 in commercial real-estate owned. In addition, we also recorded partial charge-offs totaling $4.5 million on several commercial relationships and placed three large commercial relationships in non-accrual status during the nine months ended September 30, 2009.

                                                                   September 30,       December 31,
                                                                       2009                2008
                                                                        (Dollars in thousands)
Total non-accrual loans                                           $         9,942     $       11,952

Accrual loans delinquent 90 days or more:
One- to four-family residential                                               782                128
Other real estate loans                                                         -                 72
Consumer/Commercial                                                            58                 17
Total accrual loans delinquent 90 days or more                    $           840     $          217

Total nonperforming loans (1)                                              10,782             12,169
Total real estate owned-residential mortgages (2)                             512                686
Total real estate owned-Commercial (2)                                      3,022                882
Total real estate owned-Consumer & other repossessed assets (2)                 2                 70
Total nonperforming assets                                        $        14,317     $       13,807

Total nonperforming loans to loans receivable                                5.88 %             6.14 %
Total nonperforming assets to total assets                                   5.98 %             5.57 %

(1) All of the Bank's loans delinquent more than 90 days are classified as nonperforming.

(2) Represents the net book value of property acquired by the Bank through foreclosure or deed in lieu of foreclosure. Upon acquisition, this property is recorded at the lower of its fair market value or the principal balance of the related loan.

We have taken a variety of steps over the past two years to address the credit issues identified above (elevated levels of non-performing loans and other real estate and repossessed assets), including the following:
· An enhanced quarterly watch credit review process to proactively manage higher risk loans;

· The addition of a Chief Credit Officer to oversee loan underwriting and collection processes;

· The creation of a Senior Loan Committee to review all commercial loans above individual lender authority;

· Annual third-party commercial loan review function which provides overall portfolio and individual loan feedback;

· Quarterly review of Criticized Asset Reports for each credit over $50,000;

· Developed quarterly targets for reducing levels of non-performing assets including an action plan for each non-performing asset; and

· Expanded our Collection Department to enhance our call program for delinquent loans.

Provision for Loan Losses: The provision for loan losses amounted to $3.5 million for the nine-month period ended September 30, 2009 and $1.2 million for the comparable period in 2008. The ratio of nonperforming loans to total loans was 5.88% at September 30, 2009 and 6.14% at December 31, 2008. As a percent of total assets, nonperforming loans increased to 5.98% at September 30, 2009 from 5.57% at December 31, 2008. Total nonperforming assets increased by $510,000 from December 31, 2008 to September 30, 2009.

Non-Interest Income: Non-interest income was $2.1 million for the nine month period ended September 30, 2009, an increase of $783,000 or 61.6%, from the same period in 2008. The primary reason for the increase was an increase of $851,000 in mortgage banking activities for the 2009 period. As a result of lower . . .